Imagine a job in which the employees could make ten, even twenty, million dollars every year. This is the situation of many professional baseball players. High salaries lead to the common belief these athletes are overpaid. However, the salaries earned by these men are reasonable and appropriate for multiple reasons. Firstly, major league players produce millions of dollars in revenue for the owners of sports teams. Secondly, the ways in which contracts are set up restrain younger players from making as much money as equally talented veterans. Thirdly, both owners and fans are willing to spend the money, which ultimately leads to these high salaries. Therefore, major league baseball players' salaries are justified, and in some cases not high enough, based on the revenue generated by players, the contract structure, and the willingness of the market to spend.
Every player on a baseball team affects the income of the owner of the team, most notably in local revenue. Local revenue includes "gate receipts, local television, radio and cable rights fees, ballpark concessions, local advertising, sponsorship and publications, parking, suite rentals, postseason revenue, and spring training revenues" (MLB Updated). Players provide the attraction responsible for providing the flow of money from all of these categories. Without the athletes, owners would not be able to televise games or sell tickets. The significance of local revenue appears in the rate at which it grows. This type of revenue increased by eighty-seven percent from 1995-1999, making it the quickest increasing element of revenue for the baseball industry. As a result of the growth, one billion dollars were added to the total revenue (MLB Updated). A considerable amount of this growth directly relates to the presence of the players.
While the players make the attraction possible, revenue accumulates more for a successful franchise. Fans are more willing to watch a winning team than a losing one. According to a study by University of Texas - Arlington Professor Depken, in 1997, every additional win added $1.6 million to revenue (10). This study used an array of performance statistics such as homeruns and found the correlation between them and winning. After finding the correlation, the professors were able to determine how much each player contributed to the revenue of a team. The results of this research displayed that even the highest paid players were underpaid based on income provided to the owner. Eight of the ten highest paid players in the game were paid less than deserved. On average, a major league owner profited by seventy-four percent by way of underpaying players (12). This underpayment occurred in 1997, but nowadays players make more per win for owners. Based on current spending, it appears as though a win is worth more than two million dollars to owners (Grabiner). The value of a win will continue to rise with inflation and the rising cost for a fan to attend the game. Therefore, the players' salaries should continue to rise to prevent the owners from profiting more and more from the players' hard work.
While the best players in the game are paid high salaries for the revenue increase to owners, younger, talented players' salaries are restricted due to the rules of the game. In the first six years of a career, the athlete settles for far less money than he is worth. The reserve clause in major league contracts provides the teams practically complete power in negotiations for these years (Depken 7). Therefore, salaries of these players fall closer to what the owner wants to pay for them than what the player should be paid. When the player is finally allowed to negotiate for himself in free agency, his salary shifts toward what he deserves to be paid. Becoming a free agent and negotiating for oneself allows the player to make closer to this amount but the player previously lost a considerable amount of potential money in the years prior to free agency. Therefore, players will never receive compensation for the money lost when they were without the power to bargain their own contracts.
However, some players are eligible for arbitration after their second season. The top seventeen percent, in terms of playing time, of the third-year players as well as all players with more than three seasons, but less than six, of experience can take part in arbitration (Grabiner). Arbitration allows for the player to request a salary and the owner to request a salary for this player then allow a third-party to determine the correct salary between these two. Therefore, players have to defend themselves in order to make closer to what they are worth. Still, players with less than two years of play have no rights at all and play for the league minimum salary. In 1997, the average rookie batter created $1.3 million of surplus to owners due to this set salary (Depken 12). Due to the contract rules, owners unfairly accumulate a profit from these underpaid athletes. Arbitration benefits vastly underpaid, inexperienced players, except for rookies and second year players, but does not provide nearly as much salary advancement as the free market and negotiating power of veterans in free agency.
Along with younger athletes clearly not being overpaid, all baseball players in the free market receive a justified, if not under deserving, salary because of the willingness of fans to pay to see them perform. "The more fans want to see an athlete perform, the more an athlete is paid" (Geltmeyer). If fans continue to pay the price to watch their favorite player hit homeruns, then salaries will continue to rise. Owners could not make a profit if players did not play for them; however, owners could not make a profit if fans did not pay to see the players play. Therefore, salaries are dependent on the fans providing the flow of cash. Further, better players should make more money because they produce more wins. In 1990, for every point improvement in a team's winning percentage, the revenue of that team increased by $53,070.50 (Grad 6). As shown by this number, winning leads to an increase in revenue. This is due to the willingness of fans to pay increasingly for successful teams. Selling more tickets and food products, attracting more television viewers, and increasing the chance of playoff bonus money occurs with winning (Grabiner). In addition to winning, players contribute to revenue through popularity. With experience, players gain "fan loyalty, historical expectations, and other idiosyncratic attributes," which make these individuals more valuable to the profitability of the team than the contribution to winning (Depken 16). All of these events associated to winning and popularity lead to an increase of revenue by way of fans willing to hand over as much money as requested to watch their favorite teams and players. Like any business, if the consumers are willing to pay, the employees are deserving of the profit.
While fans feed the revenue of the MLB industry, they complain ticket prices are rising so owners can pay the high wages of players. On the contrary, ticket prices are not related to athletes' salaries. As previously mentioned, salaries are related to the willingness of fans to pay. Comparatively, ticket prices are set based on how much spectators are willing to pay. Tickets and salaries exist in two different markets (Hey). Like other products, the owner will continue to raise the price until the consumer refuses to pay for it. The prices are ultimately set at a certain price to ensure the owners maximize their revenue, regardless of how much they must pay their players (Grabiner). However, sometimes owners do raise prices corresponding to the signing of an expensive, prestigious player. This is due to the assumption by the owner that an increase in the demand for tickets will raise with the new player, allowing them to charge more for the game, not in order to pay the high salary (Hey). Fans try to use high ticket prices as a motive for lower salaries. Yet, they are more than willing to keep on paying as the ticket prices climb. From 1997 to 2000, ticket prices increased along with an increase in attendance (Pappas). The players create a demand that the owners take advantage of by raising prices to maximize income; therefore, the players are justified in receiving the benefits of the owner's profit.
In addition to the fans willingness in the market, the owners also show willingness when they pay baseball players the high salaries. When baseball players enter free agency, all teams are allowed to bid for their services, making it a free market. In a free market, the employer, or owner, is willing and able to set the salary no more than the employee's, or players, contribution to the revenue (Geltmeyer). In other words, if a player contributes ten million dollars to the team's revenue, then the owner will be willing to pay up to, but not more than, this amount. The worth of a single player to his team is known as the marginal revenue product, which is the "amount of revenue the team makes with him but would not make without him" (Grabiner). Owners are in the business of baseball to make a profit; therefore, they would not want to overpay players. If an owner pays more than a player's marginal revenue product too many times, it would lead to a loss. It is in the best interest of owners to make sure salaries are below the contribution of the player in order to make a profit.
Free agency most effectively displays the effect of the free market on salaries. Both the player and the owner have a limit in mind when negotiating a contract. These two limits are the reservation wage and the marginal revenue product (Hey). The player will not agree to a salary below the reservation wage and the owner will not pay more than the marginal revenue product. Thus, the final salary falls in the "contract zone" between these two numbers (Depken 6). Being able to sign a player for less than the marginal revenue product allows the owner to create a profit because the owner expects the athlete to produce more in revenue than his salary costs. In 2001, the average team produced $52.54 million more in revenue than the total team payroll. Therefore, the owner's revenue after paying the salaries totals far more than any single player. The salary of the player must be justified if the owner willingly pays the player with the goal of making a profit.
Free agent signings rely on expectations, hurting the players' chance of making as much money as they are truly worth. The majority of free agents sign before the season begins; therefore, the owner does not know the marginal revenue product of a single player until a long time after the signing of the actual contract (Depken 17). Due to the timing of free agent negotiations, the built-in risk of guessing a player's worth pushes the salary further below the upper limit owners are willing to pay. Also, players may try harder to create more team revenue to convince owners to pay more during future contract negotiations (17). Therefore, during his current contract, he will be worth more than expected, causing him to be undervalued. The free market and the variability of the owner's willingness motivates both the owner and the player in separate ways, both leading to the greater probability of underpaying the athlete.
Major league baseball players' salaries are defensible due to the increase in revenue generated by the athletes, the unjust contract structure, and the compliance of the market to pay. While most believe baseball players must be overpaid because of the number of digits in the salary, this idea fails to put the salary in the context of the situation. Athletes are in a business that saw teams total over three and a half billion dollars in revenue (MLB Updated). If the players did not take home a substantial portion of the earnings, then the owners would pocket even more money. Also, younger players' salaries are constricted by the regulations of contracts, leading to salaries far below the marginal revenue product for most of them. Finally, free markets run on the willingness of members to spend. Fans spend money on high-priced tickets because they want to be entertained and watch a winning club. Likewise, owners gladly pay for the players because it is less than the revenue the individual produces for them. The only action capable of lowering the salaries of players would be if the fans refused to attend games or pump money into the industry, reducing the revenue of the owners and their willingness and ability to pay multi-million dollar contracts to the athletes. Until then, baseball players are not paid large sums of money just to play a child's game; instead, they are paid to make money for their bosses and, like any other employee, deserving of their share of the profit.
Works Cited
Depken, Craig A., II, and Dennis P. Wilson. "Labor Markets in the Classroom: Marginal Revenue Product in Major League Baseball." Working paper, 2002. Working Paper Archive. 2002. The University of Texas at Arlington. 15 Oct. 2005 .
Geltmeyer, John, and Bill Collins. Economics. Course home page. Del Amigo High School. 13 Nov. 2005 .
Grabiner, David. Frequently Asked Questions About the 1994 Strike. 14 Mar. 2002 .
Grad, Benjamin D. "A Test of Additional Effort Expenditure in the Walk Year' for Major League Baseball Players." University Avenue Undergraduate Journal of Economics 1st ser. 2 (1998). Princeton University. 13 Nov. 2005 .
Hey, Thomas. Government and the Sports Business. Course home page. Political Science, Indiana University - Purdue University Fort Wayne. 11 Oct. 2005 .
MLB Updated Supplement to The Report of the Independent Members of the Commissioner's Blue Ribbon Panel on Baseball Economics. 2001. Society for American Baseball Research. 10 Nov. 2005 .
Pappas, Doug. "Average Ticket Prices, 1950-2001." The Sociey for American Baseball Research. Summer 2001. 7 Nov. 2005 .